CYXI: A Growth Stock Trading Below Book Value

Since the China Expert Tech (CXTI.PK) scam last summer, I have promised myself not to touch OTC stocks again. But then there are occasional exceptions. China Yingxia (CYXI) has now made my exception since I found it to be a credible growth stock that is trading well below its book value.

At $0.67 a share (June 23 close), this stock is trading at about 0.76x its book value and 3.58 to 3.70x the company’s projected earnings for FY 08 (using total diluted shares of Q1). This seems outrageously cheap for a company that, from 2005 to 2007, grew revenue by 157% ($6.18M to 15.91M), operating income by 121% ($2.76M to 6.08M), and net income by 233% ($1.84M to $6.12M).

Besides, the company projected that, for FY 2008, revenue will grow (YoY) 32.6-37.6% to $21.1-21.9M and net income will grow 47.1-52.0% to $9.0-9.3M.

The inset plots CYXI’s revenue, operating income (2005-07) and net income from 2005 through 2008. For FY 2008, the midpoint of the company’s projection was used.

Whether the company can maintain decent growth going into the future remains to be seen. However, the company’s recent undertakings and CEO Mrs. Jiao Yingxia’s vision should help shed some light on it.

Late last year and early this year, CYXI acquired six soybean milk production lines, technology and marketing resources from Shanghai Jin Ao. More recently, it also acquired Chichi Wang companies in Southern China’s Guangzhou City. These acquisitions will serve to enlarge the company’s footprint nationwide.

The company is also serious about going international by opening its office in New Delhi, India, in the first quarter.

Perhaps the most significant event is the recent signing of a cooperation agreement with Sanitarium Australia. The agreement aims to develop China’s No.1 vegetarian health food brand and was signed June 16th at the 19th International China Harbin Fair for Trade and Economic Cooperation.

The multi-year agreement resulted from five years of due diligence, pre-study, and negotiation. The sheer size of the contract, at RMB 210M, drew a lot of attention at the Green Food section of the Harbin Fair. Last Thursday (6/19/2008), Life Daily devoted a one-page special issue to cover the story as well as highlight China Yingxia’s business strategy.

The signing of this agreement will kick off the development of a series of soybean-based fast food products. One major goal was to bring to market the so-called “Chinese Hamburger,” which is a soybean-based, all-vegetarian “Hamburger” Mrs. Jiao conceived of as a new generation of healthy breakfast/fast food for China’s vast, busy working class.

These undertakings along with Mrs. Jiao’s vision in eventually having 10,000 franchise stores clearly delineate a path of sustainable growth for many years to come.

At P/B=0.76 and P/E<3.7, this stock is definitely a steal.

Disclosure: Author is long CYXI as of this writing.

Comments

[Rick S.:]

It's good to have you back, Cabeza. As usual, your analysis is in-depth and interesting. I'll take a new look at Mrs Jaio's operation.

Does the stock still have that incredible overhang of low priced shares and options? If so, how low is the option exercise price?

2008 Jun 24 11:19 AM

[Rick S.:]

I note that in an early June SEC filing, they've announced the appointment of a new CFO. Hasn't this been a revolving door in CYXI and one of the weak spots in the operation?

I'm working off of memory in the last comment, so I could be wrong.

2008 Jun 24 11:33 AM

[megiddo666:]

CYXI is a company I have held for a long time, and while it is small, it does have a long term vision that is compelling. Thanks for the additional DD.

2008 Jun 24 11:39 AM

[User 89676:]

How do you find it to be different from cxti.pk(scam)? it could be another scam at work.

2008 Jun 24 02:56 PM

[Cabeza Howe:]

The difference between CYXI and CXTI is day and night, or haven vs. hell.

CXTI has got virtually zero media coverage in China, leaving no paper trail to indicate its legitimacy.

In the case of China Yingxia, Mrs. Jiao herself has won numerous provincial and national awards and recognitions. Perhaps the top recognition she has ever won was the 2004 Top Ten Business Talents, which put her name side by side with the likes of Mr. Liu Chuanzhi (former Lenovo Chairman/CEO) and Mr. Zhang Enzhao (former China Construction Bank Chairman).

Mrs. Jiao is well followed by the media. She is one of the role models of the Chinese woman entrepreneurs. You will also be able to follow previous media reports to reconstruct CYXI's growth history.

On the CYXI-Sanitarium agreement, it was signed on the well-known Harbin Fair a week or so ago. The event/agreement was reported by many official organizations, like provincial and national Green Food organizations and agricultural departments.

The link I gave above, Life Daily, is an official publication of Heilongjiang Province's Heilongjiang Daily Group Limited.

CYXI is simply one of the few Chinese OTC companies that you can invest with piece of mind knowing there is no likelihood of a fraud.

2008 Jun 24 09:37 PM

[Cabeza Howe:]

Rick,

Thanks for the comments. The PIPE investors themselves are all underwater now, since their bets were at $1 a share. Their warrant exercise prices are $1.5 and $2. So the overhang is not a threat at this price level. Furthermore, those investors cannot sell their shares until the share registration (last filed in April) is declared effective by SEC.

Regarding the CFO appointment, that indeed should have addressed one of CYXI's weak spots. If the CFO is good and can communicate the company's vision and business strategy effectively to U.S. investors, we small fries will soon be rewarded.

Happy investing and best regards.

Cabeza

2008 Jun 24 09:50 PM

[Rick S.:]

Thanks for the replies Cabeza. The private investors--2?,3?--are indeed under water at the present price level. New investors could more than double their money before they reach the bottom of that overhang.

Again, it's really good to have you back in the game.

2008 Jun 24 10:55 PM

[robertointe...:]

Cabeza,

have you noticed the huge increase in inventories from the quarter ending 2007-03-31 to the last quarter ($1.29M to $8.68M)? Revenues increased around 30% ($1.66M to $2.11M) in the same period but inventory shot up 600%

disclaimer: i own cyxi shares

2008 Jun 27 10:45 AM

[Cabeza Howe:]

Robert,

I certainly have noticed the significant inventory buildup in the two most recent quarters. It certainly does not feel pleasant. But note that 69% of the inventory was on raw material build up (as of 3/31/08). When you look at the recent crop price super-inflation, it is not hard to understand why companies are stocking up on these raw materials. Otherwise, they might be facing declining gross margin going forward if crop prices keep on rising. Current inventory takes roughly half a year to move through, which might still be manageable. Also if you just look at the finished goods, Q1 (53 days turnover) had a slight improvement compared to Q4 (59 days). So the products still appear to sell fine.

That said, the inventory deserves close watch in the following quarters. On the other hand, the current price level might have built in some discount for certain risks.

2008 Jun 27 10:27 PM

[jasonw:]

Anyone noticed the total number of shares increased from 17m to 37m in 2006-2007? Although sales and profits grow, EPS dropped from 0.33 to 0.16. Why the huge share dilution? And any similar plan in the future?

2008 Jul 01 02:36 AM